Valuation Effects and The U.S. Current Account Deficits
Valuation effects have been increasingly important for the U.S. in the last two decades, given a dramatic, sharp rise in international cross-country portfolio holdings. For the U.S., valuation effects are partly compensating its current account deficits and therefore mitigating the decline of its net foreign assets.
During 1994-2007, the U.S. accumulated more than US$5 trillions in current account deficits. This figure will be rising at least in 2009 and 2010. The phenomenon understandably raises a lot of concerns about the size of the U.S. external debts, because a high, unsustainable external debt can result in painful debt service and/or sharp currency depreciation.
New evidence, however, suggests that while the U.S. has been experiencing large, persistent current account deficits, the assets U.S. investors hold overseas are gaining more in value compared to the value of U.S. assets held by foreign investors. These positive valuation effects represent financial gains for the U.S. (some attribute this phenomenon to exorbitant privilege). Economists at the Federal Reserve estimated that during 1994-2007, the U.S. valuation effects (in stocks and bonds) are about +$1.2 trillion, about 22% of the U.S. total current account deficits,.
Read more about this topic: Valuation Effects
Famous quotes containing the words effects, current, account and/or deficits:
“Let us learn to live coarsely, dress plainly, and lie hard. The least habit of dominion over the palate has certain good effects not easily estimated.”
—Ralph Waldo Emerson (1803–1882)
“I have come to believe ... that the stage may do more than teach, that much of our current moral instruction will not endure the test of being cast into a lifelike mold, and when presented in dramatic form will reveal itself as platitudinous and effete. That which may have sounded like righteous teaching when it was remote and wordy will be challenged afresh when it is obliged to simulate life itself.”
—Jane Addams (1860–1935)
“All my life I’ve been harassed by questions: Why is something this way and not another? How do you account for that? This rage to understand, to fill in the blanks, only makes life more banal. If we could only find the courage to leave our destiny to chance, to accept the fundamental mystery of our lives, then we might be closer to the sort of happiness that comes with innocence.”
—Luis Buñuel (1900–1983)
“Don’t forget what I discovered—that over ninety percent of all national deficits from 1921 to 1939 were caused by payments for past, present, and future wars.”
—Franklin D. Roosevelt (1882–1945)